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Monday, September 11, 2017

Reexamining the Private and Social Costs of NPEs

Posted by
Michael Risch

It's good to be returning from a longish hiatus. I've just taken over as the Associate Dean for Faculty Research; needless to say, it's kept me busier that I would like. But I'm back, and hope to resume regular blogging.

My first entry has been sitting on my desk (errrr, my email) for about six months. In 2011 Bessen, Meurer, and Ford published The Private and Social Costs of Patent Trolls, which was received with much fanfare. Its findings of nearly $500 billion in market value decrease over a 20 year period, and $80 billion losses a year for four years in the late 2000's garnered significant attention; the paper has been downloaded more than 5000 times on SSRN.

Enter Emiliano Giudici and Justin Robert Blount, both of Stephen F. Austin Business School. They have attempted to replicate the findings of Bessen, Meurer, and Ford with newer data. The results are pretty stark: they find no significant evidence of loss at all. They also attribute the findings of the prior paper to a few outliers, among other possible explanations. These are really important findings. Their paper has fewer than 50 downloads. The abstract is here:

An ongoing debate in patent law involves the role that “non-practicing entities,” sometimes called “patent trolls” serve in the patent system. Some argue that they serve as valuable market intermediaries and other argue that they are a drain on innovation and an impediment to a well-functioning patent system. In this article, we add to the data available in this debate by conducting an event study that analyzes the market reaction to patent litigation filed by large, “mass-aggregator” NPE entities against large publicly traded companies. This study advances the literature by attempting to reproduce the results of previous event studies done in this area on newer market data and also by subjecting the event study results to more rigorous statistical analysis. In contrast to a previous event study, in our study we found that the market reacted little, if at all, to the patent litigation filed by large NPEs.

This paper is a useful read beyond the empirics. It does a good job explaining the background, the prior study, and critiques of the prior study. It is also circumspect in its critique - focusing more on the inferences to be drawn from the study than the methods. This is a key point: I'm not a fan of event studies for a variety of reasons. But that doesn't mean that I think event studies are somehow unsound methodologically. It just means that our takeaways from them have to be tempered by the limitations. And I've always been troubled that the key takeaways from Bessen, Meurer & Ford were outsized (especially in the media) compared to the method.

But Giudici and Blount embrace the event study, weaknesses and all, and do not find the same results. This, I think, is an important finding and worthy of publicity. That said, there are some critiques, which I'll note after the break.
The key difference between this and the prior paper, other than the timing, is the smaller, more targeted data set. This newer paper focuses on the largest 10 NPEs and their lawsuits against the 8 or 10 most targeted defendants (which still leads to hundreds of observations). Thus, they exclude many of the non-aggregator NPEs such as design houses that Bessen & Meurer include to the chagrin of many detractors. But they also exclude many smaller "patent holding" companies, which are responsible for many of the lowest value litigations. The authors explain that if there is going to be an effect, then surely we will see it with the ten biggest patent aggregators. I know this story well - I tell it in my own Patent Troll Myths, Generation of Patent Litigation, and Layered Patent System line of articles. And the story has the same problems for me as it does for them - there's a question of representativeness. That said, these are the biggest plaintiffs and defendants, so you would expect that it would hit the news faster - so any effect should be seen.

Furthermore, focus on the largest defendants is good for news dissemination, but I would think that smaller companies would be more susceptible to market drop upon lawsuit - Apple can weather a frivolous suit much more than a small company. Then again, the earlier paper didn't find (that I recall) the largest drops from small companies. Indeed, the largest drops came from the biggest companies, because a tiny share price drop means a huge market value drop. In any event, this is a difference between the papers to be considered.